Reform agenda in the post-war reconstruction of Iraq

25 September 2005 | Minutes

The session addressed the following issues

  1. The key economic challenges in present-day Iraq, such as the reform of vast subsidy system and public sector banks and enterprises;
  2. How the savings from subsidy reforms can be efficiently used to construct targeted safety nets for the Iraqi poor;
  3. Discuss the political economy of these reforms, their pacing and sequencing.

Dr Ali Allawi, the Iraqi Finance Minister criticised the coalition for its unrealistic and ill-conceived assumption that it could undertake market friendly reforms and create appropriate legal and regulatory arrangements to facilitate private investment. An overarching vision beyond the platitudes of the Washington consensus is needed. Few IFC agendas have tackled the system’s rigidities and distortions. Two key aspects for reform are a radical administrative shake-up and the effective use of the budgetary process.

Iraq’s situation is similar to other transition economies, but can not be compared to the former Soviet Bloc countries. Iraq suffered a “single cataclysmic event” when it was invaded on 9 April 2003, and had no gradual cultural shift towards regime change. The country’s institutions have been shaped by its 30 year legacy under the Ba’th party regime, and decades of sanctions, war and dictatorship. The three decades can be summarized thus:

  1. 1970s- the regime’s first decade in power, during which time a disproportionate amount of the budget was allocated to security building
  2. 1980s- the war economy, exacerbating external debt
  3. 1990s- a decade of sanctions

The distortions in the economy and institutions created as a result of these three decades are dissimilar to any other national situation that he has come across. It created a pattern of unique state expenditures to accommodate swings of government. Whilst the state refused to pay citizens a living wage but provided them with free services and utilities (gas, electricity).

From September 2003- June 2004 the series of measures undertaken trying to tackle glaring inconsistencies were badly done. The thin layer of change to regulate government and incentivise the private sector has lead nowhere.

A reduction in the reduction of grant aid is anticipated. In order to solve the revenue problem, oil production should be increased and security enhanced in the oil fields. He sees 2006 as an economic transition period for the economy in terms of trade, investment and external relationships. Iraq currently has debt obligations of approximately $125 billion, largely incurred during the Iran/Iraq war. A debt reconstruction strategy is also critical.

Moses Naim, editor of Foreign Policy magazine outlined that Iraq risks being a petro-state, essentially demonstrating the following traits: a distorted exchange rate (resulting in cheap imports and expensive exports); subsidies; problems diversifying the economy; a high concentration of decision-making amongst the state regulatory authority and other key players (even if the oil industry is privatised, the oil is owned by the state); corruption; a heavy state presence; inequality- the “why am I not rich?” syndrome. He suggested setting up an oil fund, in order to absorb the shock of the boom bust swing created by volatile oil prices, and to allow the revenue to be used for social spending.

Allawi responded that the challenge is not to fall into this trap. We have seen the extreme consequences of the poor policies of the past, and must not rely on ever-increasing oil exports for an acceptable standard of living. Iraq is capable of diversifying, but it does not have a private sector. He admitted that corruption exists on a monumental scale.

The Bank’s role in reconstruction was discussed. A trust fund has been set up by donors, and is being administered by the Bank and UN. $500 million has been committed by IDA for reconstruction. It is not clear how and when Iraq will switch from IDA to IBRD borrowing. Other non-Paris club creditors include Saudi and Kuwait; and the Former Soviet Union and China.